AC70050E Analyse and critically evaluate risk return considerations in relation to the application of portfolio theory and management

Financial Risk Management

Our module explores risk classifications, with a strong focus on financial risk management. It`s crucial to grasp concepts like declining profits, increased losses, and negative returns for effective risk assessment.

While we cover mathematical models, our approach emphasizes practical applications over theoretical intricacies. Theoretical concepts are presented in a simplified manner. Mathematical tools are integral to understanding the course content, but they`re presented in a manageable format.

I`ll guide you through the mathematical aspects of the syllabus, covering matrix algebra, probability, probability distributions, financial theory (including forward and option contracts, Markowitz portfolio theory), and introducing the Black-Scholes Formula along with its application. Additionally, we`ll delve into the Binomial model.

We`ll use computer laboratories to apply learned concepts in market scenarios, focusing on analyzing one and two asset returns and their associated volatilities (risk).

Module Aims:

  • Provide students with a foundational understanding of the mathematics underpinning market risk assessment.
  • Develop students` ability to apply practical risk evaluation using Excel-based financial models.

Summary of Contents:

The module`s content includes (but isn`t limited to) the following topics:

  • Introductory probability theory: Probability Distributions (Binomial and Normal distributions)
  • Matrix algebra: Using matrices in Linear and non-linear systems and Optimization Models
  • Portfolio Theory and Management: Risk, return, correlation, covariance in portfolios with risky and risk-free assets, Markowitz and the Two-Asset portfolio theory
  • Options, Futures, and Other Derivatives: Binomial Model, Black-Scholes Formula
  • Computer Applications and Applied Financial Analysis: Portfolio Theory & spreadsheet applications, Calculations of returns & volatility
  • Financial risk analysis: VaR, Conditional VaR, historical simulation, stress testing

Learning Outcomes:

  1. Understand probability theory and matrix algebra in the context of risk management.
  2. Analyze and critically evaluate risk-return considerations related to portfolio theory and management.
  3. Grasp the mathematical principles underlying financial market risk assessment.
  4. Develop and interpret spreadsheet models for assessing financial market risk.

Assessment 1:

The assessment will involve probability calculations and portfolio-related analyses, grounded in real-world financial scenarios.